World Bank warns of potential energy shock and inflation rise due to Mideast conflict

The World Bank Warns of Energy Shock as Middle East Conflict Looms

The world is on edge as tensions in the Middle East have reached a boiling point, with the possibility of a major conflict looming. The World Bank has issued a warning that such a conflict could trigger an energy shock, pushing oil prices above $100 a barrel, fueling inflation, and resulting in higher interest rates for longer.

The recent escalation of tensions between Israel and OPEC member Iran has raised fears that crude oil supplies could be disrupted, leading to a spike in oil prices. The prospect of war between the two nations has rattled global markets and sent shockwaves through the energy sector.

However, in a surprising turn of events, both Jerusalem and Tehran have seemingly decided against further escalation after exchanging direct strikes on each other’s territory for the first time. This de-escalation has led to a pullback in oil prices, with investors breathing a sigh of relief as the probability of a wider war in the region appears to have diminished.

Despite the recent calm, the World Bank remains cautious, warning that the situation in the Middle East is still uncertain. World Bank Chief Economist Indermit Gill emphasized the vulnerability of the world at this moment, highlighting the potential impact of a major energy shock on global inflation.

According to the World Bank’s latest commodity markets outlook report, oil prices could average $102 per barrel if a conflict in the Middle East results in a supply disruption of 3 million barrels per day. Such a price shock could stall the fight against inflation, undoing much of the progress made in reducing inflation over the past two years.

Global inflation, which had cooled by 2% between 2022 and 2023, was largely attributed to a nearly 40% plunge in commodity prices. However, with commodity prices now plateauing, the World Bank forecasts modest declines of 3% this year and 4% in 2025.

Gill noted that global inflation remains a persistent challenge, as falling commodity prices have hit a wall. This could mean that interest rates may need to remain higher than currently expected this year and next, further complicating the economic outlook.

While the conflict in the Middle East presents significant upside pricing risks, there is a glimmer of hope on the horizon. If OPEC+ decides to start unwinding its production cuts this year, the world could see some relief. The World Bank estimates that oil prices could fall to an average of $81 a barrel if the cartel brings 1 million barrels per day back onto the market in the second half of the year.

As the world watches and waits for developments in the Middle East, the specter of a major conflict and its potential impact on energy markets looms large. The delicate balance of global energy supply and demand hangs in the balance, with the World Bank’s warning serving as a stark reminder of the fragility of the current economic landscape.